Kentucky's public pension system is in crisis. The Kentucky Teacher Retirement System alone has $14.5 billion in liabilities, and as program costs skyrocket the rest of the state budget, which is already facing a massive shortfall, is getting squeezed beyond recognition. With tragic irony, the cost of paying for teachers' and other public employees' retirement (along with other factors) is now threatening the financial solvency of school districts and forcing massive cuts to education spending.
Last fall Governor Bevin proposed pension reforms that would have made significant changes to the teacher retirement system for current employees and moved future teachers into a 401k-style system. Unfortunately, the Governor also couched his proposals in such unnecessarily combative rhetoric, many educators were left with the impression that he blamed them for the pension crisis, adding insult to the injury of breaking almost every promise active employees had come to expect from their retirement system.
I was critical of the Governor's language and of key aspects of his pension proposals, but equally dismayed with my fellow educators who seemed to deny that there really was any need for pension reform at all and who unreasonably predicted the demise of the teaching profession if any changes were made. Educators needed to take the problem seriously, and step up with some alternative proposals for reform. I was pleased when a coalition of educator groups came forward with a "Shared Responsibility" plan, which did include some substantive changes to the pension system, but which likely did not go far enough to make the program sustainable long term. I hoped aloud that there would now be ground for some common sense compromises that would preserve as many promises for current retirees and those close to retirement as possible while making meaningful reforms.
Earlier this week, legislative leaders introduced Senate Bill 1, a pension reform bill that walks back from the more drastic changes proposed by the Governor but whose key feature is a hybrid system similar to what I have imagined would be the most common sense way forward for future employees. Below I want to unpack key features of SB 1. It's not perfect and probably needs some additional tweaks, but I'm hopeful that the core of the plan, or something very like it, will win widespread support, including from educators.
As I noted when I first started writing about the pension problem, there are several important disclaimers I should make: 1) I am by no means an expert on this topic; here I am only addressing proposed changes to the Kentucky Teacher Retirement System, and not the plans for other public employees. 2) I am an active member of KTRS with 17 years of accumulated service, so I have a personal stake in whatever reforms are made as well as a professional concern for teachers and education in general, and a citizen's concern for the viability of the pension system and its impact on the rest of the state budget. 3) Any opinions expressed on this website are mine alone and to not reflect the views of the various organizations with which I am affiliated, including Western Kentucky University and the Kentucky Board of Education.
Impact on current retirees
The Governor's proposed pension reforms placed a five-year freeze on all cost of living adjustments (COLAs) for current retirees. SB 1 does not freeze COLAs but permanently reduces them by half, from 1.5% annually to .75% as long as KTRS is less than 90% funded overall. I understand the immediate cost savings this brings to the system, but I'm sympathetic to the notion that no significant changes should be made to current retirees who worked their entire careers under different assumptions about their financial security. I hope that lawmakers might revisit this provision.
SB 1 also eliminates retirement COLAs altogether for future employees, but that's something those teachers have their whole careers to plan for (as I wrote before, I have always recommended that teachers make their own separate retirement investments outside of KTRS to increase their long-term financial security).
Sick leave and calculation of retirement benefits for current employees
SB 1 allows current employees to continue accumulating sick days, which can be partially cashed out upon retirement, but no sick days earned and retained after July 1, 2018 will be factored into the employee's overall retirement benefit (sick days accumulated until then will factor in). This proposal is consistent with the educator groups' Shared Responsibility Plan and seems reasonable to me. No one loses any of the benefits earned so far, but this change in policy creates an immediate cost savings for the program.
The current system includes a 3% factor added into the benefit calculation for employees who reach 27 years of service and are at least 55 at retirement. Under SB 1, that 3% factor will apply only when an employee reaches 30 years, and only to those who have accumulated 20 years of service by July 1, 2018. For current employees with less than 20 years of service (like me), the 3% service factor will only apply after 35 years of service and after age 60. This means folks like me will need to work longer until retirement from KTRS for the same benefit, or retire and perhaps work longer in a second career. Of course that is disappointing, but it also puts me more at the typical retirement age that normal citizens expect. (The whole notion of "retirement" is supposed to mean what you do when you stop working...not when you start your second career).
Likewise, the current system calculates pension payouts based on the average of the employee's three highest years of salary. That will remain for current employees who have already reached 20 years of service, and will still apply for current employees with less than 20 years if they work until age 60 and at least 35 years of service. I haven't found it in the bill, but I presume that anyone retiring before those thresholds are met will have benefits calculated based on the highest five years of salary, as was proposed by the administration. This is an improvement over the administration's original plan, which would have essentially ended the pension program altogether for employees once they reach 27 years. But it still brings the system more in line with the kinds of retirement expectations faced by average Kentuckians, few of whom can expect to retire in their early or mid-50's with a generous, guaranteed lifetime pension.
Double dipping
A feature of the Governor's plan that had far reaching implications was the prohibition on KTRS retirees from holding any further state employment while drawing benefits. SB 1 does not prohibit retirees from state employment, but does stipulate that they may not initiate a second state retirement account. Again, this seems fair to me. Retirees still have ample employment opportunities, including with state agencies (where they often make important post-career contributions) but without costing the pension system additional money.
Future employees: Hybrid cash balance plan
Under SB 1, teachers entering the system after January 1, 2019 will have to work longer in their careers to retire with full benefits. A "rule of 87" will govern retirement eligibility, so employees will be able to retire when their age and years of service equals 87, but with a minimum retirement age of 57. For second or later career teachers, provisions allow retirement at age 65 with a minimum of 5 years of service.
More significantly, all new employees in the Teacher Retirement System will be enrolled in a hybrid plan that blends features of the traditional pension system with a more flexible and portable investment plan that has certain features of a 401k. The pension portion guarantees a minimum defined benefit in retirement (important since Kentucky teachers are not allowed to draw Social Security). The cash balance portion functions like a 401k in that it is automatically invested on behalf of the employee and handled by fund managers and grows based on market returns. Employees can also contribute additional amounts to the cash balance plan, with some limits (contribution limits typically rise as you get older). Upon retirement, you can take an annual annuity from the cash balance portion along with the traditional pension payment, or take the lump sum value and reinvest it elsewhere. The employee's contributions to the cash balance account are also portable. If you leave your job you can take those funds with you and roll them over into new investments.
Effects on future teachers
There's no getting around that this new system will be less generous than what Kentucky teachers have enjoyed in the past. New teachers will have to plan carefully for their own retirements and the wise will make additional investments to diversify their portfolios - as they all should have been doing already. Markets are risky, but no less risky than trusting future politicians to keep promises made by past politicians. I've tried to plan carefully for my family, but if I had more of the funds that went to KTRS on my behalf to invest instead in other places over these last two decades, I might actually be facing a brighter retirement future right now.
Many educators have expressed fears about how these changes will affect the desire of future generations of young people to pursue education as a career. It's true that the numbers of applications to teacher preparation programs are dramatically down nationwide already. But that's due to a wide variety of factors. The bottom line is that none of us pursued this career because of the pension plan. That was a nice perk and one we hoped to enjoy, but it wasn't the reason we chose teaching as our vocation. And the lack of a comparatively lavish pension plan in the future won't be the reason young people don't.
Many have also argued that we don't actually have a pension problem in Kentucky, but rather we have a revenue problem: our tax structure does not generate enough revenue to cover vital public services, include good benefits for educators. It's definitely true that our tax system doesn't foster enough economic growth to generate needed revenues (something I hope lawmakers will address in the coming year). And it's true that we will have to devote far more resources to better funding of the system moving forward (something the Governor and General Assembly are already taking steps to do).
But revenue alone will not address this problem. The system is not sustainable in its current configuration, and it is unfair to Kentuckians who aren't public employees and to the many other public services we want the Commonwealth to provide. We have to remember that "more revenue" means more money out of the pockets of our fellow Kentuckians.
I believe our work as educators is one of the greatest forms of public service and it should be rewarded fairly. I also believe Kentuckians would be eager to pay more taxes for the direct benefit of students. But asking them to sacrifice more so that I can retire at age 55 while they work a decade longer trying to scrape together their own retirement is not a deal I want to offer anyone. Nor is it a deal I think most Kentuckians are willing to make.
Common sense, common ground reform
Senate Bill 1 is not perfect. Besides the cost of living cuts for current retirees mentioned above, it includes a requirement for districts to contribute an additional 2% to the retirement plans of all new employees. This may well prove a fatal mandate for some districts already struggling for financial survival. Lawmakers should consider carefully whether this provision should remain in the bill.
Otherwise, SB 1 looks like a common sense, common ground approach to pension reform that preserves a reasonable amount of the current system for active employees. The core of this plan is well worth the consideration - and the support - of Kentucky educators.
Update: I've heard from some teachers that the jump from 27 years experience and 55 years old to a 60 years old/35 years of service threshold for full benefits is too much for current employees. I empathize. Based on my own circumstances, this amounts to a full 8 additional years of service. That's not what my family planned for, and while we can make this work, it might well prove an incentive for me to retire from KTRS earlier than I had planned and work elsewhere. Obviously that saves the pension system money if I do, but there's also a price to pay if you have large numbers of experienced educators vacating the profession prematurely. Lawmakers might consider additional adjustments to SB 1 to raise the eligibility threshold for full benefits, but perhaps not as much as currently proposed. Of course, every step we take back toward the current pension structure represents a longer period of time it takes to make the entire system sustainable. So there are many trade-offs to consider.
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